Preapproved Auto Loan vs. Dealer Financing

Car buyers commonly encounter two financing approaches: obtaining a loan preapproval before shopping or arranging financing through the dealership.

Both approaches can work. The important thing is to compare the actual financing terms.

What Is a Preapproved Auto Loan?

A preapproval means a lender has reviewed your application and provided an indication of the financing terms you may qualify for, subject to the lender's conditions.

The preapproval can give you a useful reference point while shopping for a vehicle.

Advantages of Getting Preapproved

  • You may know your approximate financing budget before shopping.
  • You have a financing offer to compare against dealer financing.
  • You can focus on the vehicle price separately from financing.
  • You may have more negotiating confidence.

How Dealer Financing Works

A dealership may work with one or more financial institutions to arrange financing.

The dealer can submit your application to participating lenders and present available financing options.

The actual process varies between dealerships and lenders.

Dealer Financing May Still Be Competitive

Getting preapproved does not mean dealer financing will always be more expensive.

Manufacturers sometimes offer promotional financing programs, particularly on selected new vehicles.

Compare the actual offers before deciding.

What Should You Compare?

Compare:

  • APR
  • Loan term
  • Amount financed
  • Monthly payment
  • Total of payments
  • Finance charges
  • Required fees

Do Not Focus Only on the Monthly Payment

A dealer can potentially reduce a monthly payment by extending the loan term.

That does not necessarily mean the financing is cheaper.

Compare the total cost of the loan.

Use a Calculator Before Signing

Our car loan calculator can help you estimate payments using different APRs, terms and down payments.

Use it as a comparison tool before reviewing the final lender paperwork.

Final Thoughts

There is no universal winner between preapproved financing and dealer financing. The best choice is usually the financing offer that provides favorable terms and fits your budget.

Obtaining a preapproval can nevertheless be useful because it gives you another offer against which to compare dealer financing.